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Answer: US risk-free interest rates are greater than foreign interest rates (r > rf)
For a currency futures/forward quoted as **USD per unit of foreign currency**, IRP implies: \[ F_0 = S_0 e^{(r_{USD}-r_{foreign})T} \] If futures prices **increase with maturity**, then the forward curve is upward sloping, which means: \[ r_{USD} - r_{foreign} > 0 \] So: \[ r_{USD} > r_{foreign} \] Therefore, **US risk-free interest rates are greater than foreign interest rates**.
Author: Manit Arora
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Question-166.5. If currency futures are quoted in US dollars per unit of foreign currency, and if foreign exchange futures prices are increasing with maturity, what does interest rate parity (IRP) imply?
A
US risk-free interest rates are greater than foreign interest rates (r > rf)
B
Foreign interest rates are greater than US risk-free interest rates (rf > r)
C
Spot exchange rates are greater than foreign interest rates
D
Foreign interest rates are greater than spot exchange rates
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